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Reputational Incentives for Restaurant Hygiene

Reputational Incentives for Restaurant Hygiene. Ginger Zhe Jin University of Maryland Phillip Leslie Stanford University. How does reputation work?. Consumers do not know quality ex ante Consumers learn and form beliefs (=reputation)

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Reputational Incentives for Restaurant Hygiene

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  1. Reputational Incentives for Restaurant Hygiene Ginger Zhe Jin University of Maryland Phillip Leslie Stanford University

  2. How does reputation work? • Consumers do not know quality ex ante • Consumers learn and form beliefs (=reputation) • Consumer beliefs drive consumer choice in the next period • Reputation motivates sellers to provide high quality

  3. Empirical studies of reputation • Demand • Borenstein & Zimmerman (1988) • Hubbard (2002) • Gompers and Lerner (1998) • Brickley, Coles and Linck (1999) • Price effect • Gorton (1996) • eBay reputation studies • We focus on supply-side effects • Does reputation cause firms to provide high quality? • No need to control for consumer prior belief

  4. Restaurant hygiene • January 16, 1998, LA county restaurant inspectors start issuing hygiene grade cards • A grade if score of 90 to 100 • B grade if score of 80 to 89 • C grade if score of 70 to 79 • score below 70 actual score shown • Grade cards are prominently displayed in restaurant windows • Score not shown on grade cards

  5. Question • In Jin & Leslie (2003) we show that grade cards cause restaurants to improve hygiene => before grade cards there is a shortage of information to consumers • Before grade cards, about 25% of restaurants had A-grade hygiene • Why have good hygiene if consumers cannot really tell the difference?

  6. Reputational incentives • Some restaurants are able to form reputations for good hygiene • Depends on underlying factors that affect consumer learning • chain affiliation => possible free-riding for franchisees • degree of repeat customers in local region => regional clustering in hygiene quality

  7. Examples of repeated customers • Brickley & Dark 1987 • restaurants close to free way exits have fewer repeated customers • may be a poor measure in LA county • Residential vs. tourist area • Snug Harbor: 93/ 92/ 90 • Blue Rose Cafe: 59 / 82/ 72/ 74

  8. Alternative explanations • Regional differences in willingness-to-pay for hygiene quality • Exogenous restaurant heterogeneity • Manager preferences • Hygiene cost differences

  9. Data and Identification • We observe more information than consumers do • All hygiene inspection outcomes in LA county from July 1995 to Dec 1998 => hygiene quality • Restaurant name, location, chain affiliation and owner identity => variations in consumer learning • Grade cards introduced in Jan 1998 • Exogenous policy change • Grade cards eliminate informational differences across restaurants

  10. Basic evidence - chain affiliation

  11. Basic evidence - regional clustering

  12. Region clustering before GC

  13. Regional clustering after GC

  14. Santa Monica before GC Upper 1/3 Lower 1/3

  15. Regressions for chain affiliation: Before GC only: (kitchen sink) Before and after GC:

  16. Kitchen sink regression before GC

  17. Chain locations in Santa Monica

  18. Full sample with restaurant FE

  19. Due to cost differences?

  20. Our solution • is the mean score after grade cards • Assume that two restaurants in the same city with same post-GC score, have the same hygiene cost function • See if the difference in their pre-GC score is related to chain affiliation

  21. Regress sB on sA

  22. Test of regional clustering Before GC: After GC: Regional effects before GC: Regional effects after GC:

  23. Test 1: Absolute differences in regional effects Assuming α3=0 implies If rj=r, then We reject equality with 99% confidence

  24. Test 2: relative differences in regional effects • Allowing for α3 ~=0 • If rj=r, then • Estimate with and without restriction: • We reject rj=rwith 99% confidence

  25. Extensions • The chain effect may be smaller in regions with a high degree of consumer learning • pass absolute differences test for chains • fail relative differences test for chains • absolute regional effects change less for chains than for non-chains • Franchisee free-riding may be smaller in regions with a high degree of consumer learning • Tests fail to support this hypothesis

  26. Conclusion • We analyze reputational incentives by testing supply-side implications • The results indicate • Chain affiliation is an effective source of reputational incentives • A small degree of franchisee free-riding • Regional differences in the degree of consumer learning impact hygiene quality for independent restaurants • Large impact of grade cards suggests low degree of consumer learning for most restaurants

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